Mortgage Repayment Holidays
Most home loan lenders will give you a temporary repayment holiday if you're struggling to make repayments if you meet their criteria. Here's how it works.
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A mortgage repayment holiday is a temporary period of time where your lender pauses your monthly mortgage repayments. This can be very helpful for borrowers in temporary financial hardship.
Read on to find general information about different ways to put your mortgage repayments on hold and other options for borrowers facing financial hardship.
5 ways to pause or reduce your home loan repayments
There are several options available for pausing your home loan repayments. Some of these can be quite simple, while others may be a little more challenging.
- Temporary mortgage payment suspension through hardship variation. If you are unable to keep up with your regular repayments because of temporary financial stress you can apply to your lender for a hardship variation. If your lender agrees they will pause your repayments and add all interest charges on your home loan to the end of the loan term. This can extend your loan term and add thousands of dollars to your original loan amount, but could keep you from losing your home.
- Temporary mortgage payment reduction. If your income has been reduced temporarily, such as one spouse losing a job and leaving you with only one income, you may be able to apply for a temporary reduction in your mortgage payments. In this situation, your lender may ask you to provide an amount of money you think you can comfortably repay without putting you into financial hardship.
- Temporary mortgage payment suspension using your redraw facility. If you have been making extra payments off your mortgage balance, you may find that you have funds available. This is known as a redraw facility. Rather than withdraw these, you may be able to use them to substitute making repayments. Note that not all mortgages have a redraw facility.
- Switch payments to interest-only. If your mortgage has principal and interest repayments you might be able to temporarily switch to interest-only repayments. This will reduce your monthly repayments significantly in the short term because you only have to pay the interest charged on your loan. But over time this will cost you more because you will need to repay the whole mortgage eventually.
- Refinance your mortgage. How competitive is your interest rate? If you can switch to a lower rate your repayments will go down. While not a repayment holiday, refinancing to a lower home loan rate will make your life a little easier.
How long can my repayment holiday be?
The length of a repayment holiday is largely up to your lender. Most lenders will take into account your individual circumstances, and set up a repayment holiday that meets your needs.
Be aware, however, that while your repayments are reduced or paused, interest is still accruing on the principal of your home loan. This means you'll eventually need to either increase your repayments or the length of your loan term in order to make up the difference.
How much does a mortgage payment holiday really cost?
Stopping the payments on your home loan even for a short time can cost you a lot more than you might think.
Let's assume your mortgage balance is $300,000 with an interest rate of 6.2%. Your minimum monthly repayments are $1,838 per month, which you pay comfortably for the first 12 months. After this time, you've managed to get your home loan balance down to $296,451.40, but you find that you've lost your job and you need to take a three month mortgage holiday.
During your repayment holiday your lender adds the interest charges onto your loan balance. The interest that was added to your home loan balance during that first month will also have interest charged on it during the second month. Both of those amounts will have interest charged on them during the third month of your holiday.
- Month 1: an additional $1,531.66 is added to your loan balance
- Month 2: an additional $1,539.11 is added to your loan balance
- Month 3: an additional $1,547.06 is added to your loan balance
By the end of your three month holiday you will owe an extra $4,617.83 on top of your previous loan balance of $296,451.40. That means you now owe $301,069.32.
And because your loan balance is now higher but your loan term remains the same (you have 29 years left) your repayments will increase from $1,838 to $1,865 per month. This is only $27 per month, so it doesn't sound like much, but if you add up those payments over the total course of the loan, you end up with a very different figure.
On the new payments, the total amount you'll pay back to the bank is $649,183.21. Yet, if you'd found a way to stick to your original payments without taking the payment holiday, you would only have paid $639,416.
That's almost a $10,000 difference over the total loan term.
Of course, if you face the prospect of losing your home during a period of temporary financial hardship, those costs might be worth it in the long run.
The big four banks have programs in place to help home loan customers facing financial hardship.
ANZ allows customers to take a repayment holiday of up to three months. During the repayment holiday, interest will still accrue on the outstanding principal. Once the repayment holiday is over, you can either increase your repayments or extend your loan term to cover the extra interest that has accrued. To find out more about ANZ’s relief programs, head here
Commonwealth Bank offers repayment relief on a case-by-case basis. A Commonwealth Bank representative can work with you to find options, including extending your home loan term to reduce your repayments. Head here to find out more about Commonwealth Bank’s relief programs
NAB offers individualised hardship agreements. The bank has a customer team who specialises in putting together payment plans or variations. Any variations will require you to make up payments in the future, but NAB’s specialists will help you put together a plan to catch up on your commitments. To find out more about NAB’s hardship programs, head here.
If you’ve made additional repayments on your Westpac home loan, you can reduce your payments by up to 50% for up to six months. This option is available twice during the life of your loan.
If you’re experiencing financial hardship, you can contact Westpac to set up a hardship plan. The bank also offers free independent advice from a financial counsellor, and access to the Salvation Army’s Doorways program, which specialises in helping individuals and families in financial hardship. To find out more about Westpac’s financial hardship programs, head here.
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